The guidance contains practical advice for navigating ESG diligence and compliance.
On June 19, 2020, the Equator Principles Association (EPA) issued Guidance on Implementation of the Equator Principles During the Covid-19 Pandemic, as prepared by Ramboll (Guidance).
The 24-page Guidance provides lenders and borrowers with direction on how to address COVID-19-related issues in all aspects of project development and financing. The Guidance contains critical information that must be taken into account in any pending or planned project financings subject to the Equator Principles (EPs).
Key Commercial Takeaways
Practical Advice to Lenders
The Guidance makes clear that COVID-19-related impacts must be taken into account in project due diligence. In particular, Equator Principles Financial Institutions (EPFIs) may work with their agents and advisers, including the Lenders’ Environmental and Social Consultant (LESC), to review the adequacy of the borrower’s response against good practices identified in the Guidance. For projects yet to reach signing and/or financial close, environmental and social due diligence (ESDD) undertaken by the EPFI should confirm that the borrower’s assessment and management of environmental and social (E&S) risks include adequate consideration of COVID-19. For projects in construction or operational phases during the pandemic, the assessment of the borrower’s COVID-19 response may form part of scheduled monitoring activities and/or review of borrower self-monitoring reports. Additional interim COVID-19 reviews may be appropriate depending on the project risk and the timing of the scheduled monitoring visit or reporting period.
The Guidance also states that the scope of, and approach to, ESDD needs to consider both COVID-19-related restrictions on the ESDD process and the borrower’s management response to the pandemic. Liaising with advisers will be important in setting and agreeing the scope of ESDD in a timely manner. Engagement with any other lenders to agree ESDD scope will also be important, and all-lender communication may help accelerate decision making when appropriate.
The ability of EPFIs and their advisers to undertake in-field site visits of borrowers’ projects/facilities, either as part of the pre-financial close ESDD or as part of post-financial close monitoring, is likely to be affected by travel restrictions during the pandemic. Options to overcome such restrictions should be developed, taking into consideration the materiality of compliance risks and the specifics of the project and its location. Options suggested in the Guidance include: (i) delay of site visit; (ii) virtual site visits; (iii) use of local consultants; and (iv) increased remote communications between EPFIs, their advisers, and borrowers beyond formal virtual visits (e.g., phone calls, emails, and information updates).
According to the Guidance, prior to loan signing/financial close, key aspects of the ESDD in the context of COVID-19 restrictions relate to ensuring that: (i) a robust EP-compliant ESDD can be completed; (ii) the borrower has been able to complete all material assessments and planning activities necessary to meet EPs compliance; and (iii) E&S provisions in the loan documents take due account of COVID-19-related risks and uncertainties. For relevant projects, the pre-financial close ESDD will include a review of the borrower’s Environmental and Social Impact Assessment (ESIA) and Environmental and Social Management Plan (ESMP). The ESDD review of these documents may need to take into consideration any limitations in their development due to COVID-19 restrictions, and whether COVID-19 risks have been adequately addressed. COVID-19 aspects to be considered by the borrower in the development of the ESIA and ESMP are further discussed in the Guidance.
The Guidance, as noted above, makes clear that E&S provisions within the loan documentation need to reflect potential COVID-19 risks and impacts, and also provide for implementation of relevant mitigation measures. According to the Guidance, EPFIs may consider these on a case-by-case basis as part of the loan negotiation with support from their advisers. Aspects to be considered may include, but are not limited to, the following:
- Defining force majeure to include reference to the time period of disruption when force majeure can be claimed
- Drafting of the definition of material E&S incidents and remedial actions/cure periods (including with respect to event of default) to adequately address disease/pandemic-related impacts
- Linking the timing of key E&S compliance actions (e.g., Equator Principles Action Plan deliverables) to project milestones rather than calendar dates, when possible and appropriate
- Evaluating to the scope of work of the LESC and monitoring visits to address COVID-19, as described in the Guidance; this may include requirements on the borrower to ensure that agreed appropriate technology is available to facilitate virtual site visits
- Ensuring detailed requirements for self-monitoring reporting by the borrower (e.g., drone footage, time-lapse photography, etc.)
Practical Advice to Borrowers
Generally, the Guidance recommends that borrowers evaluate the risks that COVID-19 involves and how it may impact its workers, internal and external stakeholders, and the project timeline while also updating or developing emergency response plans. Borrowers should keep lenders apprised of the spread of COVID-19 in the relevant community, if any, and any direct impacts on the project.
Specific considerations borrowers will need to consider include the following (refer to the Guidance for an exhaustive list):
- Clearly state COVID-19-related limitations on assessments (such as the ESIA and the ESMP).
- Specifically include COVID-19 risks and impacts in assessments.
- Develop COVID-19 plans that have clearly delineated roles and buy-in from senior management, as well as internal and external stakeholder coordination (in relation to undertaking stakeholder engagement, the Guidance specifically references an additional resource).
- Update Emergency Preparedness and Response Plans (EPRPs), and include credible worst-case scenarios (such as “waves” of the pandemic).
- Consider developing a specific COVID-19 Community Response Plan — noting, for example, that the project could be perceived as exacerbating the spread of COVID-19 in the community.
- Consistently monitor and update response plans.
- Include clear guidelines for lifting restrictions and responding to future waves in all planning.
- Keep lenders updated as circumstances evolve, especially regarding COVID-19-related outbreaks or deaths within the workforce.
- Review potential impacts on local communities and assess mitigation; this may include sharing/provision of resources (e.g., medical facilities, equipment, transport, test kits, food for vulnerable people in isolation, etc.).
- Assess any vulnerable supply chains as well as economic effects that suspending the project may have on local supply chains and indirect employment in the community (in addition to being considerate of the borrowers’ own workforce and vulnerable populations therein).
Latham & Watkins will continue to monitor and share developments on the Equator Principles.
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The firm also has a dedicated, publicly available COVID-19 Resources page.
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